Budgeting 101 – Part 5 of 5
The following article by Robert W. Powell, CPA CA CIRP LIT, was published in the March 2017 issue of the District News. In Part 4 of the series, I talked about dealing with lumpy expenses. In the 5th and final part of this series I will be discussing Catastrophic expenses.
Catastrophic expenses are those expenses that you have no reasonable expectation of knowing that they are coming and they have a material and negative impact on your finances to the extent that you cannot recover from the impact and, in fact, may not even be able to deal with the expense in the first place.
You can’t really stay awake at night worrying about such expenses because you don’t know they are coming. These are different from the lumpy expenses which you should know are coming and which you can plan for and manage. However, lumpy expenses can have a catastrophic impact on your finances if you have chosen not to plan for them – see Part 4 of this series.
Examples of catastrophic expenses include:
- Black mold in your house causing it to be condemned and unsaleable with no insurance coverage and a mortgage that still has to be dealt with.
- Being sued for damages over an accident where you are at fault with limited or no insurance. The legal fees to defend yourself could be a catastrophic expense even before consideration of a judgment being awarded against you.
- Buying a used lemon vehicle, fully financed, that requires ongoing and significant repair expenses.
- Having a guarantee called where you guaranteed (or co-signed) someone else’s debt.
- And the list goes on.
Whether the expense is catastrophic or not depends on how big the expense is and how well you are financially situated. If you have managed your finances and built equity in your house (say $40,000) and get called on a $20,000 guarantee, this is probably not catastrophic but will be painful and set you back financially. However, if you get called on the $20,000 guarantee and have absolutely no way to deal with it, you may be forced to file for bankruptcy or file a consumer proposal to deal with that debt and your other debts in order to get a fresh start.
The better you have managed your finances, built equity, savings, etc. the more you will be prepared to deal with significant but unexpected expenses. But, the best planning will not necessarily fully protect you from the impact of catastrophic expenses. Unfortunately, there is some luck involved in life – both bad luck and good luck and neither can be planned for.
Powell Associates Ltd. is a licensed insolvency trustee focused on providing debt settlement, proposal and bankruptcy solutions for individuals and businesses. We offer free consultations to review your personal financial situation and practical debt resolution options. Contact us to discuss your situation over the phone or book an appointment to meet us face-to-face in Saint John, Moncton, Fredericton, Charlottetown or Dartmouth – it’s your choice.
You might be interested in reading:
- Budgeting 101 - Part 4 of 5
- Budgeting 101 – Part 3 of 5
- Budgeting 101 – Part 2 of 5
- Budgeting 101 – Part 1 of 5